The use of unauthorised reinsurance is growing in the US property/casualty insurance industry - according to a special report by AM Best.

But the report also reveals that an expensive infrastructure of collateral tracking, accounting and reporting surrounds the practice.

Meanwhile, mitigating credit risk arising from the quality of reinsurance, whether with an authorised or unauthorised reinsurer, has become an integral part of a carrier's enterprise risk management.

Furthermore, the findings showed that the percentage of insurance premium ceded to reinsurers increased moderately from 1996 to 2001, but reinsurance premium growth slowed abruptly in 2003 as several companies increased their net retention in response to higher reinsurance costs.

A series of losses beginning in 2002 failed to reignite reinsurance premium growth, and by the end of 2006, premiums ceded had decreased to 11.5 percent of total direct written premium, the lowest ratio over the 11-year period it was studied.

The ratio of net reinsurance recoverable to surplus was volatile over the 11 years, starting at 31.4 percent in 1996 and ending at 22.6 percent in 2006, with peaks exceeding 40 percent in 2001 and 2002 after the September 11 attacks.

The ratio of the total overdue amount to the total reinsurance recoverable was 37.7 percent in 1996 and 46.6 percent in 2006, with some fluctuations between the two years.

The rate of unauthorised reinsurance ceded premiums increased from 21 percent in 1996 to 35 percent in both 2005 and 2006.

The US property/catastrophe industry's total exposure to credit risk on unauthorised reinsurance during the 11 years held relatively steady, and the net credit exposure to reinsurance recoverable was $133.2 billion at the end of 2006.

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